In the world of trading, there were several occasions of so-called cornering a market. This term means, in general, a situation where someone with a certain market or financial power is able to create an artificial shortage of whatever. In this article, we will take a closer look on the term cornering a market and also check some examples. So let’s start!
Historical background
The term cornering a market got publicly known back in the times in the late 19th century when the futures traders in Chicago were exploiting an advantage by creating an artificial shortage which was called “corners”. That’s where the term cornering a market comes from.
How did they do this? Well, they used the anonymity of futures and bought as much of them as there was sufficient to be able to control the market. Usually, it were pretty often the wheat traders who made the term “cornering” infamous!
As they bought, the sellers of the wheat futures were obligated to deliver. That’s how the idea of futures works. But there was, of course, a lot of speculation, also among the futures sellers. A certain amount of them sold more futures than they were able to deliver. Doing this, they were just speculating that the price of the futures would fall, and with that, they would buy their too many sold futures back for a lower price and thus, made an extra profit.
And here was the catch: As one wheat trader, or sometimes a couple of them, cornered the market and was holding the most contracts in their own hands, there weren’t enough futures the sellers could buy back to get rid of the too many sold futures contracts. At least, not for a regular price. In other words, they were “backed into a corner”.
But to fulfill their obligations, they were forced either to deliver the wheat or buy the futures back at exorbitant prices!
Those who could deliver the grain, fulfilled their obligations, and the person who cornered, had a lot of it. And the price got, because of the artificial shortage, pretty high. Now the next step was to bring this grain to the markets, where the wheat was sold at a loss to make sure to get rid of it all. Doing that, the artificial shortage turned into a glut and the price collapsed literally. This move of selling the grain at a loss was called “burying the corpse”.
The first futures trader who was cornering the market in a big way was a wheat trader called Benjamin Hutchinson (Old Hutch) from Massachusetts. In 1888, he successfully cornered the wheat pit and earned a couple of millions of dollars. If you want to know more about the cornering a market and the history of futures trading, I can recommend you to read the book “The Futures“* by Emily Lambert. I really enjoyed this one, and I hope it will enrich and widen your horizon as it did in my case.
Is cornering the market illegal?
Cornering a market is for sure illegal because it creates an unfair advantage and a price manipulation. For that reason, the Securities and Exchange Commission (SEC) closely watches trading activities of particular securities but also foreign exchange or commodities. The goal (or the attempt) is to prevent and prosecute illegal trading behavior. But also the Commodity Futures Trading Commission is monitoring the futures market and is bringing from time to time someone to justice, like in the case of Fenchurch Capital Management, imposing $600.000.
Disadvantages of market cornering
Apart from fact that cornering a market is illegal, there also some disadvantages for the person who is trying to corner the market. That’s what I would call a poetic justice.
As opposed to the early wild west days in the futures trading in Chicago, one of the disadvantages of cornering a market is the fact that’s just difficult to do nowadays. Cornerers usually groan under the pressure of their own size. For you really need huge amount of money to hold almost all positions available, and most companies or traders don’t neither have the infrastructure or means to pull off a corner successfully.
Not only that – in a digital trading world with a maximum transparency, it’s just a matter of time to get busted. From this moment, it becomes pretty difficult to get successful in this undertaking and the whole entity becomes vulnerable.
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Examples of cornering the market in futures
I’ve already mentioned the cornering of the wheat pit by the “Old Hutch” in 1888. Let’s check some more cornering examples in the world of futures:
Wheat – by Joseph Leiter in 1897. He bought wheat futures worth $22 Million and wheat worth $18 Million. Philip Armour, one of the richest persons in Chicago back then, sold Leiter an impressive load of futures until he realized that he was cornered by Leitner. Because of that, he offered Leitner a deal to settle up for $4 million. But Leitner refused believing he could send the wheat price higher.
But Armour, with deep pockets, could get enough wheat to fulfill his delivering obligations. Besides that, because the cornering process took several months, the farmers got wind of the high wheat prices. Therefore, they started to grow a lot of wheat and caused a glut which was contributing to the price collapse. Long story short, Leiter lost all his paper profits and turned the whole deal into a huge loss of $10 Million.
Rye – by Daniel Rice and General Foods in 1944. Because of a complaint of the regulators, it ended up in a trial where the judge found that Rice and his companions had attempted to corner the market. There were rumours that Rice had sunk a boat full of rye to corner the market. If true or not, we will never know. But as result, Rice and respondents were denied to trade for various periods and got some other restrictions as well.
Onions – by Vincent Kosuga and Sam Siegel in 1955. Actually, there were more traders involved in the manipulation but only these two were nabbed. In autumn of 1955, Kosuga and Siegel had bought onion futures and onions to be able to control 98% of the onion market in Chicago. As expected, this move caused not only an artificial shortage but also an increase in onion prices and with thus, the farmers around started to grow more onions to sell them at a higher price. But in 1956, with a higher offer of onions, Kosuga and Siegel helped to drive prices down with the onions they have had in stock. As an answer to this manipulation, President Eisenhower signed in 1958 the so-called Onion Futures Act, banning the onion futures. That’s why since that time trading onions on an exchange is not possible anymore. To read the whole story, check the book “The Futures“* by Emily Lambert.
Silver – by Hunt brothers in 1979 – 1981. The Hunt brothers who were heirs of the oil tycoon H. L. Hunt, tried to corner the soybean market around the 1977 before they started the next attempt. This time on the silver market. In 1979, the silver pit went haywire because the Hunt brothers were buying silver futures in huge amounts. With this, they drove the silver price such high that people across the United States started to take their silver out of the drawers and selling it to local jewelries which melted the silver down. Long story short: the Hunt brothers held already in 1979 estimated around $100 million troy ounces of silver and a lot of several futures on silver.
But at the end, Hunts overextended themselves and got a margin call for freaking $100 million they couldn’t meet. As a result, they lost more than a billion dollars.
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Examples of cornering a market in securities
Northern Pacific – in 1901. The Northern Pacific Railway was a railroad that operated across the western United States from Minnesota to the Pacific Coast. This example of cornering a market happened because of the interest in the company called “Chicago, Burlington and Quincy Railroad”. At this time, Charles Perkins, was the president of this company which had a direct connection to Chicago. Henry Villard, the early president of Northern Pacific, James J. Hill, the CEO of the Great Northern Railway, Edward Harriman, the director of Union Pacific Railroad wanted to buy this company.
Charles Perkins wanted $200 per share for his Chicago, Burlington. Harriman and Hill were willing to pay it. At the end, The Chicago, Burlington and Quincy Railway was purchased by them with 48.5% going to both the Great Northern and the Northern Pacific.
But Harriman from Union Pacific decided to buy out the Northern Pacific. Therefore, he initiated a raid on Northern Pacific stock and was able to purchase a majority total worth of $80 million. Hill from Great Northern started to “shoot back” by purchasing 200.000 stocks of Northern Pacific on a single day, pushing the price of the stock higher and higher. The problem was that many traders had short positions in Northern Pacific stock because the raid made the stock overvalued.
With such a big position, Harriman had unintentionally cornered Northern Pacific stock, and Hill, with his 200.000 shares on a single day, added the fuel to the fire. The consequence was that there were scarcely shares left to buy back to cover the shorts. The stock price then exploded in a short squeeze with the highest recorded price on the NYSE of $1000.
As neither Hill nor Harriman were willing to sell their stocks, they decided to call a truce, leaving the short traders in an economic ruin.
If you are interested in the Northern Pacific corner more detailed I can recommend you to read Reminiscences of a Stock Operator* by Edwin LeFèvre* who documented the dealings of the Northern Pacific Corner. Another interesting book about the fight between Harriman and Hill you can read is the one called Harriman vs. Hill: Wall Street’s Great Railroad War* by Larry Haeg.
The Stutz Motor Company – in 1920. In this case, it was a “war” between the short sellers and the owner of Stutz Motor Co, Allan A. Ryan, who cornered the shorts. Also, in this case there were no winners but the whole situation ended in a disaster for Ryan and short sellers as well. In February 1919, the Dow Jones turned per definition into a bear market and with this, the Stutz stock also suffered a certain decline. But Ryan interpreted this decline not as a bear market but as a short raid caused by the short sellers. To thwart this, he started to buy the Stutz stock massively, also by borrowing millions of dollars to support the price. The shorts, on the other hand, were convinced that sooner or later, the stock’s price would collapse, and they continued to short Stutz.
At a certain point, when Ryan was the only lender of the stocks, he soon knew who shorted him because back then, there were no anonymous machines making the trades but persons acting “against” each other. So he knew that the most borrowers were members of the NYSE including the members of the Board Governors. In other words, the persons who bet against him were working with him on the floor, and they tried to ruin him with their short positions. So it got personal for him, I guess. Maybe that’s why he offered to the short sellers to settle for $750 while the “regular” price of the Stutz stock was around $391.
Because of that, the whole situation ended up in a seesaw and dragged on a couple of months, involving several contentions and disputes between Ryan and the NYSE. Ryan even resigned his member seat on the NYSE to be able to act independently. In April 1920, the shorts finally agreed to accept a settlement price of $550. With that, Ryan would make $1.5 million of profit. But appearances were deceiving, for he had to pay the banks he owed millions he took to purchase the stocks. So the only way he could pay the banks was to sell shares on Stutz. But because the NYSE had suspended the Stutz stock, he couldn’t sell enough stocks to the public. Long story short: Ryan’s ostensible victory ended in his bankrupsy because the banks wanted their money back. So in this case of cornering a market, both sides lost tremendously.
Volkswagen – in 2008. What happened in this attempt of cornering a market? Long story short: Porsche tried to get the majority of shareholding on Volkswagen and caused a panic amongst the short sellers. This caused a soar in Volkswagen stock up to more than €1.000. But how did it come to the situation and the panic? Well, Porsche announced that it owns around 75% of VW shares. As the German federal state owns 20% of VW’s stocks, this meant that only 5% of VW’s stocks were available, and with thus, the corner on VW was “perfect”. But of course not for the short sellers as they started to close their short positions and with this it came to an unbelievable short squeeze in VW’s stock. It total: Porsche won but the financial damage for the hedge funds was enormous – around $30 billion.
Summary
- Cornering a market means to get advantage over a certain market by creating an artificial shortage
- It’s highly illegal nowadays and that’s why the markets are getting observed by the SEC and CFTC
- There were several occasions of corners but not every attempt was successful in the past
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